Bank bonds are outperforming debt from industrial companies by the most since March as investors wager the biggest overhaul of Wall Street regulations since the Great Depression won’t cripple profits at financial firms. U.S. bank bonds returned 1.35 percent this month, the second-best performing class of investment-grade debt after tobacco companies, compared with a gain of 0.5 percent for industrial companies, according to Bank of America Merrill Lynch index data. Non-financial firms returned 2.09 percent in June versus 1.89 percent for banks. Bank debt yields 252 basis points more than similar- maturity Treasuries, a spread that’s 81 basis points wider than industrial debt, Bank of America Merrill Lynch index data show. The cost of protecting Goldman Sachs Group Inc. bonds from default fell to the lowest since April after the bank settled its fraud lawsuit with the Securities and Exchange Commission, the same day the U.S. Senate sent its bill to the White House for President Barack Obama’s signature. “It’s a good situation for the market that we do have a little clarity on both” regulatory reform and the Goldman Sachs lawsuit, said Lon Erickson, managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees about $9 billion in fixed-income assets. JPMorgan Chase & Co., the second-biggest U.S. bank by assets, raised $2.9 billion in its largest bond offering in more than a year after reporting that quarterly profit rose 76 percent. Charlotte, North Carolina-based Bank of America Corp., the largest U.S. lender, and Citigroup Inc., the third-biggest, posted earnings today that beat analysts’ estimates. Spread to Treasuries Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged at 188 basis points, or 1.88 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Average yields fell to 3.891 percent from 3.929 percent. Google Inc., owner of the world’s most popular search engine, received a first-time credit rating of Aa2, the third- highest level of investment grade, from Moody’s Investors Service, which cited the company’s “substantial financial flexibility as well as its conservative financial philosophy.” Google’s board authorized the Mountain View, California- based company, which yesterday reported quarterly profits that missed estimates, to issue as much as $3 billion in commercial paper. Credit-Default Swaps A benchmark credit-default swaps indicator in the U.S. rose. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, rose 0.7 basis point to a mid- price of 108.7 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Financial Index of swaps on 25 banks and insurers rose 3 basis points to 138, according to JPMorgan at 9:30 a.m. in London. The indexes typically decline as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. In emerging markets, the extra yield investors demand to own corporate bonds instead of government debt rose for a second day, after declining for six straight days. Spreads widened 3 basis points to 308 basis points, according to index data from JPMorgan. The spread, down from 339 basis points on July 1, was as low as 229 on April 15 and as high as 359 on May 25. Nature’s Bounty Banks agreed to provide $2.4 billion of debt to back Carlyle Group’s acquisition of NBTY Inc., the maker of Nature’s Bounty, MET-Rx and Solgar nutritional supplements, according to a person familiar with the transaction. Bank of America Merrill Lynch, Barclays Capital and Credit Suisse Group AG are providing loans and bonds to back Carlyle’s takeover of Ronkonkoma, New York-based NBTY, said the person, who declined to be identified because details aren’t public. Carlyle will provide $1.4 billion in equity, or 37 percent of the deal value, the person said. The $3.8 billion leveraged buyout is the biggest LBO since TPG Capital, based in Fort Worth, Texas, and Canada’s CPP Investment Board agreed to buy software-provider IMS Health Inc. for $5.2 billion in November, according to data compiled by Bloomberg. Bank Spreads JPMorgan bonds were the most actively traded U.S. corporate securities yesterday by dealers, with 204 trades of $1 million or more, followed by General Electric Co., with 173, Bloomberg data show. The most active in junk bonds was Ford Motor Co. with 52 trades. High-yield, high-risk debt is rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. “Financials definitely are more attractive than industrials on a spread basis,” said Rajeev Sharma, who oversees $1.4 billion of investment-grade credit at First Investors Management in New York. “In this kind of market, where yields are so low, it’s kind of hard to not take a close look at financials, because they do look attractive relative to industrials.” Senators voted 60-39 yesterday in favor of rewriting rules governing Wall Street firms, passing a bill that aims to avoid a repeat of the 2008 credit crisis. Rules on derivatives and proprietary trades are largely left for the Federal Reserve, SEC and Commodities Futures Trading Commission to complete. ‘Multi-Year Process’ “Given all the uncertainty of what the financial bill is ultimately going to look like, what the regulators are going to do, this is going to be a multi-month, multi-year process before all the rules are set in stone,” said William Dennehy, senior fixed-income portfolio manager at Chicago-based Northern Trust Co., which has $150 billion in assets under management. Credit-default swaps on Goldman Sachs for five years fell 20 basis points to a mid-price of 150 basis points as of 4:33 p.m. in New York, according to broker Phoenix Partners Group. The swaps had been trading as high as 177 basis points before the SEC’s announcement. Goldman Sachs agreed to pay $550 million and change its business practices to settle U.S. regulatory claims it misled investors in collateralized debt obligations linked to subprime mortgages. The penalty is the largest ever levied by the SEC against a Wall Street firm, the agency said in a statement. Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said. ‘Mistake’ The settlement appears to indicate “negligence, not fraud,” Brad Hintz, an analyst at Sanford Bernstein & Co., said in an e-mail, citing the SEC’s use of words such as “mistake” and “incomplete information.” “Bottom line the SEC and the administration gets a headline and a ‘political win’ and GS gets an ‘economic win,’” he said. JPMorgan’s offering was its biggest since selling $3 billion of 10-year debt in April 2009, according to data compiled by Bloomberg. The two-part offering yesterday included $2.5 billion of 4.4 percent, 10-year notes that priced to yield 145 basis points more than Treasuries, the data show. The bank paid a spread of 127.5 basis points in its sale of similar- maturity 4.95 percent notes in March. JPMorgan took a $6.3 billion reduction in provisions for soured mortgages and credit-card loans from last year, as second-quarter net income climbed to $4.8 billion. Citigroup said profit dropped 38 percent even as falling stock and bond markets curbed trading revenue and prompted companies to pull or delay mergers and underwriting mandates, and Bank of America said pressure from overdue loans abated. “Loan performance is the biggest thing we’re watching in the short term,” said Guy Lebas, chief fixed-income strategist at broker dealer Janney Montgomery Scott LLC in Philadelphia. “The markets can’t place a valuation on trading profits if there’s little way to guess what future trading profits will be.”

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